The Volokh Conspiracy

Two weeks ago, President Obama asked EPA Administrator Lisa Jackson to shelve plans to tighten the National Ambient Air Quality Standard for ozone, leaving any reconsideration of the current standard until 2013. This past week, the EPA announced it was delaying the planned release of proposed regulations to control greenhouse gas emissions from power plants under the Clean Air Act. This is the second time EPA has delayed publication of these rules.

Viewed together, these decisions suggest the Obama Administration is making a conscious effort to moderate its regulatory policy, particularly in the environmental area. If so, why would this be? Could it possibly make political sense for the Obama Administration to acquiesce to GOP attacks on environmental protection? After all, as Ann Carlson noted at Legal Planet, environmental protection remains popular,and polls suggest relatively few Americans believe environmental regulation costs jobs (though it can).

It is inconceivable that the Obama Administration believes that these moves will placate Tea Party opposition or win plaudits from across the aisle. But that’s not the point. Nor is aggregate popular opinion on these questions particularly relevant to the political calculus. Rather, as I noted in comments to Ann Carlson’s post, what matters are the views of marginal voters and, in particular, marginal voters in politically significant states. That is, the opinions of moderates and independents in Ohio, Pennsylvania and West Virginia matter more than the views of environmental activists in San Francisco or Washington, D.C.

Viewed in this light, the political rationale of these decisions is easier to understand. Insofar as these moves are politically inspired, it would appear the aim is to placate those potential constituencies in battleground states most sensitive to the costs of new and impending environmental regulations. Think coal and power company unions, small businesses in what remains of the industrial midwest, and moderate Democrats in state and local governments whose enthusiasm is essential for voter turnout. These sorts of groups are more likely to notice whether the Obama Administration appears to be moderating the EPA’s regulatory zeal or tightening the screws, and such issues may influence their votes.  There’s a reason Joe Manchin (D-WV) ran against environmental regulation, and the White House is certainly understands where proposed environmental rules would have the greatest economic effect.

None of this means that the Obama Administration’s decisions were politically driven — I have no deep inside sources — or that they are politically wise.  The ozone NAAQS decision was almost certainly political, but the latest decision may well have been influenced by other concerns.  But if the Obama Administration is deliberately trimming the EPA’s sails, the political calculus is easy to understand.

The Internal Revenue Service is beginning to promulgate regulations to implement the tax-related provisions of the Affordable Care Act (aka “ObamaCare”). A proposed rule issued last month provides that eligible taxpayers may receive tax credits for the purchase of qualifying health insurance plans established by states under Section 1311 or by the federal government under Section 1321. The only problem is that this is not consistent with the actual text of the statute passed by Congress.

ACA Section 1401 provides that eligible taxpayers may receive income tax credits for purchase of insurance “through an Exchange established by the State under Section 1311.” Section 1311 calls upon states to establish health insurance exchanges. It does not provide for the federal government to create health care exchanges. Rather, a separate provision of the act, Section 1321, provides that if a state does not “elect” to create an exchange that meets federal requirements, the federal government shall then “establish and operate” an exchange. Thus, under a plain reading of the text, the ACA only provides for tax credits for state-run exchanges, and if states fail to create exchanges, there are no tax credits for insurance bought on a federally run exchange.

This is potentially significant for several reasons. The individual mandate requires all Americans to purchase health insurance. Even if the mandate is successful at reducing adverse selection, health insurance premiums are still expected to rise due to other provisions in the law.   Higher premiums could make it difficult for many Americans to comply with the mandate. For this reason, Congress not only called upon states to create exchanges, it also authorized tax credits to offset the cost of health insurance premiums for those with incomes between 100 and 400 percent of the poverty level.   But if these tax credits are only available for insurance purchased through state-based exchanges, many will be left high-and-dry in states that don’t create their own exchanges — and this could be a big problem. According to one recent report, only ten states had passed legislation to create qualifying exchanges through August 2011. (See also here.)

As David Hogberg reports in IBD, this has led some to believe the limitation of tax credits to state-based exchanges is a mistake. Under this theory, Congress meant to provide tax credits for any exchange-purchased insurance, because Congress wanted lower-income individuals to be able to purchase health insurance (and comply with the mandate). This may be true. As Vanderbilt’s James Blumstein tells IBD (and I discussed in this paper), the exchange-related provisions of the law were not written all-that-carefully. Nonetheless, federal agencies lack the authority to unilaterally revise statutory mistakes. (A point Cato’s Michael Cannon also makes here.)  Congress may have wanted to make tax credits more widely available — just as it may have wanted those making less than poverty-level income to be eligible for exchanges as well — but that is not what Congress did.

The IRS may be inclined to argue that the failure to include a reference to federally run exchanges or Section 1321 in Section 1401 was a “scrivener’s error” that should be disregarded. But this is a difficult argument to make in this case for several reasons. First, a “scrivener’s error” is supposed to be that – a purely clerical error that could be attributed to a failed transcription or something of that sort. An example would be mistaking the relevant subsection in a statutory cross-reference – say mistaking “(i)” for “(ii)” or “Section 36B(B)(I)(b)” for “Section 36(B)(I)(b),” or screwing up punctuation. The alleged error here is more significant, however. Not only did Congress forget to include any reference to Section 1321, it also expressly stated that the tax credits were for insurance purchased through “an Exchange established by the State.” So a legislator reviewing the relevant language could not claim that they did not realize the statutory cross-reference excluded federal exchanges because the clear text of the statute does as well. In other words, any legislator who actually bothered to read the bill before voting would have seen the limitation.

Another problem for the “scrivener’s error” argument is that it is usually dependent on showing that it is implausible, and not merely unlikely, that the statutory provisions were a mistake. As the Supreme Court explained in U.S. Nat. Bank of Oregon v. Independent Ins. Agents of America, Inc., 508 U.S. 439 (1993), this will be shown in the “unusual” case in which there is “overwhelming evidence from the structure, language, and subject matter of the law” that Congress could not have consciously adopted the language in the statute. Similarly, in Appalachian Power Co. v. EPA, 249 F.3d 1032 (D.C. Cir. 2001), the D.C. Circuit explained that:

We will not . . . invoke this rule to ratify an interpretation that abrogates the enacted statutory text absent an extraordinarily convincing justification because . . . the court’s role is not to correct the text so that it better serves the statute’s purposes, for it is the function of the political branches not only to define the goals but also to choose the means for reaching them. . . . Therefore, for the [agency] to avoid a literal interpretation . . ., it must show either that, as a matter of historical fact, Congress did not mean what it appears to have said, or that, as a matter of logic and statutory structure, it almost surely could not have meant it. [internal quotations and citations omitted]

Given what’s in the ACA, this is a showing that the IRS and HHS would have a hard time making. While it is certainly plausible – perhaps even likely – that many in Congress wanted tax credits for the purchase of health insurance to be broadly available, there is also ample evidence that the ACA was designed to induce states to create exchanges of their own. For example, Section 1311 directs states to create exchanges. Further, as Blumstein notes, under the ACA the federal government could sue to force a state to create an exchange. As in other policy areas, the federal government can’t force states to comply, so it uses a combination of positive and negative incentives – in this case, subsidies for creating exchanges and the threat of a federally run exchange if a state does not create one on its own. In this context, limiting the availability of tax credits to insurance purchased in state-run exchanges can be seen as just an added inducement. Much like the Clean Air Act threatens states with the loss of highway funds if they fail to adopt sufficiently stringent pollution control programs, the ACA as written threatens states with the loss of tax credits for state residents if they do not create an exchange. Such a policy may not be wise or fair – and may undermine the goal of getting more people insured – but it takes far more than that to justify ignoring a statute’s plain text.

Neither the IRS nor HHS has addressed these concerns as far as I’m aware, nor has anyone else. I’ll certainly do a follow-up post if such arguments are out there. I noted that the ACA’s text limits subsidies to state exchanges at a conference on health care reform and the states last fall, and no one suggested I was in error, but that does not mean I am right. It’s also possible there’s some other overlooked provision of the ACA that could be used to solve this problem. If so, I couldn’t find it, but I’ll also post an update if such a provision is found. In the meantime, the limitation of tax credits to those who purchase their insurance in state-run exchanges could be unwelcome news to those in the majority of states yet to create exchanges of their own.

I should also note that I have not addressed what would happen if the IRS were to just go ahead and finalize regulations providing for tax credits beyond those authorized by the ACA’s text. Under such a scenario, standing to challenge the IRS’ action in court would certainly be a big issue. As a general matter, there is no standing for a taxpayer to challenge a tax benefit conferred upon someone else. But the IRS, like all federal agencies, has an independent obligation to comply with the law, and I do not know of anyone who has argued that the IRS may create tax credits at will just because it thinks that’s what Congress meant to do and such actions are not easily challengable in court. Just imagine the sorts of mischief such a doctrine could unleash.

The New York Times tries to provide some perspective to the renewed debate over the economic effect of environmental regulation, and the effect of regulation on jobs in particular.  The story was prompted by President Obama’s decision to ask Environmental Protection Agency Administrator Lisa Jackson to withdraw a proposed revision of the National Ambient Air Quality Standard for ozone.  Business groups and many local government officials cheered the move; environmentalist groups were dismayed.

Part of the problem in evaluating the costs of regulation is that there have been few systematic studies of such costs after regulations are imposed.

“Regulations are put on the books and largely stay there unexamined,” said Michael Greenstone, an economist at the Massachusetts Institute of Technology. “This is part of the reason that these debates about regulations have a Groundhog’s Day quality to them.”

Mr. Greenstone has conducted one of the few studies that actually measure job losses related to environmental rules. In researching the amendments to the Clean Air Act that affected polluting plants from 1972 and 1987, he found that those companies lost almost 600,000 jobs compared with what would have happened without the regulations.

But Mr. Greenstone has also conducted research showing that clean air regulations have reduced infant mortality and increased housing prices, and indeed many economists argue that job losses should not be considered in isolation. They say the costs of regulations are dwarfed by the gains in lengthened lives, reduced hospitalizations and other health benefits, and by economic gains like the improvement to the real estate market.

The NYT story did not provide links to Prof. Greenstone’s research, so I added them above. For those interested in the subject, a third paper by Greenstone looks at the extent to which air quality improvements can be attributed to the federal Clean Air Act. Prof. Greenstone is, among other things, the former chief economist of President Obama’s Council of Economic Advisers.

The story closes with a quote from current Obama Administration “regulatory czar” Cass Sunstein, who’s in leave from the Harvard Law School.

“My view is that the Republican claim that ‘job-killing regulation’ is a redundancy is as ridiculous as the left-wing view that ‘job-killing regulation’ is an oxymoron,” said Cass Sunstein, head of the White House Office of Information and Regulatory Affairs. “Both are silly political claims that have no place in a serious discussion.”

I agree with Professor Sunstein that the debate over whether regulation kills or creates jobs is not very productive. As a general matter, when a firm is forced to spend money complying with environmental regulations, such expenditures are likely to take the place of more productive investments.  Some of these expenditures may benefit other firms, such as those which sell products or services that assist with compliance, but are still unlikely to offset the negative effects of the initial diversion.  As a consequence, whether or not there are net economic benefits from environmental regulation will usually depend on the magnitude and nature of the other benefits the regulation provides — benefits that may or may not translate into job creation. Even if an environmental regulation generates net economic benefits, this does not necessarily translate into increased employment.  But whatever the effect of regulation on jobs, and even assuming the effect could be predicted with any accuracy, this is only one factor to be weighed when considering the desirability of regulation.

UPDATE: Matt Kahn notes that Clean Air Act regulation is not uniform across the nation, and insofar as regulations adopted pursuant to that law have reduced employment in some parts of the country, this has been offset by greater job creation elsewhere.  Indeed, this differential effect is one reason why the Clean Air Act was amended to impose greater restrictions on “cleaner” areas, as B. Peter Pashigian documented in a 1985 paper.

Another interesting aspect of Clean Air Act regulation, relevant to President Obama’s recent decision, is that the economic consequences of tightening a NAAQS may be severe, but they are anything but immediate.  Once a new NAAQS is finalized, state and local governments have many years to develop plans to come into compliance, so no direct regulatory burden would have been imposed on private firms for many years.  Thus whatever the merits of withdrawing the NAAQS revision proposal, and deferring any tightening to 2013, it will not do much for the economy in 2011, except insofar as one believes the prospects of tighter environmental regulations in the future is a significant impediment to investment and job-creation in the present.

President Obama today told the U.S. Environmental Protection Agency to set aside plans to tighten the National Ambient Air Quality Standard for ground-level ozone (aka “smog”). The proposed tightening was fiercely opposed by business groups as well as state and local governments, as the latter are charged with developing plans to meet the standards. In addition to the anticipated costs of metting the new standards, opponents pointed out that the EPA is required to review its air quality standards every five years, and would have to review the standards in 2013. The ground-level ozone standard was last revised in 2008, but the Bush Administration did not tighten them as much as environmentalist groups had wanted.

The text of the  President’s statement released by the White House is below the jump.

Continue reading ‘White House Halts New Federal Smog Standards’ »

Nobel-laureate economist Gary Becker provides a useful reminder that the existence of widespread “market failures,” such as those that contributed to the financial collapse and subsequent recession, does not by itself justify government intervention. However bad markets may be at times, there’s no guarantee that government will be better. Here’s an excerpt from Becker’s op-ed.

The traditional case for private competitive markets goes back to Adam Smith (and even earlier writers). It is mainly based on abundant evidence that most of the time competitive markets work quite well, usually much better than government alternatives. The main reason is not that individuals in the private sector are intrinsically better than government bureaucrats and politicians, but rather that competitive pressures discipline market behavior much more effectively than government actions.

The lesson is that it is crucial to consider whether government regulations and laws are likely to improve rather than worsen the performance of private markets. In an article “Competition and Democracy” published more than 50 years ago, I said “monopoly and other imperfections are at least as important, and perhaps substantially more so, in the political sector as in the marketplace. . . . Does the existence of market imperfections justify government intervention? The answer would be no, if the imperfections in government behavior were greater than those in the market.” . . .

Government regulations and laws are obviously essential to any well-functioning economy. Still, when the performance of markets is compared systematically to government alternatives, markets usually come out looking pretty darn good.

At one level this argument is self-evident — no set of institutional arrangements operates as well in practice as in theory — but it is regularly forgotten in policy debates. As Becker observes:

The widespread demand after the financial crisis for radical modifications to capitalism typically paid little attention to whether in fact proposed government substitutes would do better, rather than worse, than markets.

Indeed, when many policymakers see a potential market failure, they almost inevitably call for government intervention to restrain market excesses. Yet when government fails, interestingly enough, the proposed policy solution is often the same: more government intervention. The point here is not that government intervention is never justified — Becker himself believes some government regulations are “essential” — but that it must be justified with serious comparative analysis considers the possibility government may fail as well.

I reviewed Douglas Kysar’s Regulating from Nowhere: Environmental Law and the Search for Objectivity for the Spring 2011 issue of The New Atlantis.  Overall, I found Kysar’s book thoughtful, provocative, wide-ranging and well-written, but not persuasive. In many ways, I think Kysar pursues the wrong quarry, and ignores some of the deeper problems in contemporary environmental law. Nonetheless, the book presents many arguments worth considering and engaging.   Here is how the review concludes:

If Kysar’s ultimate concern is for a greater recognition of and reaching toward the environmental values he holds dear, his complaint should be less with CBA and utilitarian calculus than with the centralized regulatory structure in which they are used to impose one-size-fits-all policies. In selecting the wrong target, Kysar embarks on a journey to the wrong destination. Were we to take Kysar’s advice, we would no longer “regulate from nowhere,” but we would still regulate from nowhere good.

The full text of the review has just been made available online here.

The Supreme Court accepted cert on two more cases on Tuesday. One of these cases, Sackett v. EPA, could be quite significant for administrative law. The case arises out of an all-too-typical wetlands regulation dispute. The Sacketts own a lot in a residential subdivision upon which they planned to build a home. After they graded the lot, they were received an Administrative Compliance Order (ACO) from the EPA alleging they had violated the Clean Water Act by filling a wetland without a federal permit and ordering them to commence costly restoration, under threat of substantial penalties. The Sackett’s sought to challenge the ACO, believing that their land does not constitute jurisdictional wetlands subject to federal regulation, but the Clean Water Act does not provide any basis for doing so absent waiting for the EPA to commence a civil action. According to the EPA, what the Sacketts could have done is applied for the permit they believe they do not need, and if their permit application was denied, then challenge the EPA’s jurisdictional determination in federal court. But this is hardly an appealing option, particularly given the substantial costs the permitting process entails. So the Sacketts filed suit in federal court, but the district court and U.S. Court of Appeals for the Ninth Circuit agreed with the EPA that the ACO was not subject to a pre-enforcement challenge.

In agreeing to hear the case, the Supreme Court accepted cert on the following two questions: 1. May petitioners seek pre-enforcement judicial review of the administrative compliance order pursuant to the Administrative Procedure Act, 5 U. S. C. §704? 2. If not, does petitioners’ inability to seek pre-enforcement judicial review of the administrative compliance order violate their rights under the Due Process Clause? While this case focuses on the Clean Water Act’s ACO regime, the cert grant makes clear that it will have broader application to laws that employ similar enforcement mechanisms, including the Clean Air Act and Superfund. In particular, this case could have a significant influence on regulatory enforcement, where traditional notions of Due Process often get short shrift.

Richard Frank and Holly Doremus have more on Sackett at Legal Planet, as do the folks at the Pacific Legal Foundation who brought the case.

I have an article in the new issue of Regulation on the REINS Act, which would prevent major regulations from taking effect without the passage of a joint resolution of approval by Congress.  The article is largely based on my Congressional testimony about the Act, and summarizes the arguments for and against the measure.  My prior posts on REINS can be found here.

At a recent press conference touting House GOP plans to reduce regulatory burdens on business, members of Congress expressed dismay that the Environmental Protection Agency may tighten the National Ambient Air Quality Standard for ozone (aka urban smog) without considering the economic costs. Rep. Vicki Hartzler (R-Mo) remarked:

I received this week a letter from the EPA regarding a letter I’ve written them about some of their rules and they wrote here, quote, “Thus, the agency is prohibited from considering costs in setting these standards.” Now in business we do a cost benefit analysis before we make policy changes. Washington should as well.

Rep. Hartzler is right to be concerned about the consequences of tightening the ozone NAAQS any further, but the EPA can’t be faulted for not considering costs. As EPA Assistant Administrator Gina McCarthy explained in a letter to Rep. Hartzler:

Under the Clean Air Act, decisions regarding the National Ambient Air Quality Standards (NAAQS) must be based solely on an evaluation of the scientific evidence as it pertains to health and environmental effects. Thus, the agency is prohibited from considering costs in setting the NAAQS. But cost can be – and is – considered in developing the control strategies to meet the standards (i.e. during the implementation phase).

McCarthy is correct. The EPA has been prohibited from considering costs when establishing NAAQS for the past three decades. The U.S. Court of Appeals for the D.C. Circuit first interpreted the Clean Air Act to preclude such cost consideration in Lead Industries Association v. EPA in 1980, and the Supreme Court reaffirmed this interpretation of the Act in Whitman v. American Trucking Associations in 2001. As noted regulatory zealot Justice Scalia explained for a nearly unanimous court:

Section 109(b)(1) instructs the EPA to set primary ambient air quality standards “the attainment and maintenance of which … are requisite to protect the public health” with “an adequate margin of safety.” 42 U.S.C. § 7409(b)(1). Were it not for the hundreds of pages of briefing respondents have submitted on the issue, one would have thought it fairly clear that this text does not permit the EPA to consider costs in setting the standards. The language, as one scholar has noted, “is absolute.” D. Currie, Air Pollution: Federal Law and Analysis 4—15 (1981). The EPA, “based on” the information about health effects contained in the technical “criteria” documents compiled under §108(a)(2), 42 U.S.C. § 7408(a)(2), is to identify the maximum airborne concentration of a pollutant that the public health can tolerate, decrease the concentration to provide an “adequate” margin of safety, and set the standard at that level. Nowhere are the costs of achieving such a standard made part of that initial calculation.

One may quarrel with Justice Scalia’s interpretation of the Clean Air Act — I, for one, did some work for parties advocating a different interpretation in this litigation — but it is the law of the land, and the EPA is not to be faulted for following the law. If members of Congress do not like this, they have but one solution: Amending the Act.

This is not an isolated example. The EPA is frequently attacked for doing what they are required to do by existing federal statutes or judicial interpretations thereof. Numerous members of Congress and outside groups have accused the EPA of a “power grab” for proposing to regulate greenhouse gas emissions under the Clean Air Act. The EPA’s GHG regulations will be quite costly and extensive, while producing minimal environmental benefits (as I detail here). Yet such regulation is clearly authorized, if not required, by the Supreme Court’s decision in Massachusetts v. EPA.

Senator Sherrod Brown (D-OH) wrote the EPA in February urging it to “reconsider” the regulation of GHG emissions from utilities and other large stationary sources under the Clean Air Act. Senator Brown may have avoided the inflammatory rhetoric of his Republican colleagues, but his error was the same. Given the EPA’s conclusion that GHG emissions contribute to global warming that may be reasonably anticipated to threaten health or welfare, it has no choice but to impose the regulatory measures to which Senator Brown objects. Here again, there are plenty of reasons to oppose the EPA’s initiatives, but the EPA is not to blame. Rather, the Agency is doing what the Clean Air Act (as interpreted by the courts) requires.

If members of Congress disapprove of the EPA’s emission-control initiatives, they need to take responsibility for the laws on the books, and not scapegoat the EPA. However overzealous the EPA may be sometimes, most of its recent Clean Air Act initiatives are plainly authorized, if not required, under federal law. Indeed if the agency is to be faulted, it is for rewriting the Act to allow for less expansive regulation than the statutory text clearly requires. It was Congress that delegated expansive regulatory authority to the EPA, and Congress that enacted provisions making some regulatory initiatives obligatory. If members of Congress don’t like that, it is up to Congress to fix it.

Last month, University of Richmond law professor Noah Sachs published an article in The New Republic criticizing the proposed REINS Act, which would require Congressional approval before any major regulation could take effect. As with many attacks on the REINS Act, Sachs’ article misrepresents the legislation to make its case. As there is a hearing on the bill today, I thought I’d address some of the arguments he makes.  In case some find this to be redundant with my prior posts on the subject (1, 2, 3), the bulk of this post is below the fold.

Continue reading ‘REINS Act — A Response to Noah Sachs’ »

Tomorrow the House Judiciary Committee will have a second hearing on the REINS Act, a bill to increase legislative control over and accountability for federal regulatory policy. The central provisions of the REINS Act provide that new “major rules” – those regulations expected to cost over $100 million annually – may not become effective unless a joint resolution of approval passes Congress. The Act would further create an expedited review process designed to ensure that there is a prompt up-or-down vote in each house of Congress on all new “major” rules, which represent less than five percent of the 3,000-plus federal regulations promulgated each year. My prior posts on the REINS Act are here and here, and my congressional testimony is here.

The purpose of the REINS Act is to prevent the imposition of major regulatory initiatives without Congressional approval. Because of Congress’ long history of delegating broad rulemaking authority to administrative agencies, there is relatively little legislative control of, and accountability for, the regulations agencies impose on the American people. The best way to ensure greater legislative accountability is to require members of Congress to vote “yea” or “nay” on new major rules. This will prevent unpopular rules from being adopted, but also ensure that Congress is accountable for those new major rules that are imposed. If the public wants more regulatory protections in particular areas – and it may well – the REINS Act will not stand in the way. Environmentalist groups and progressive academics see the REINS Act a bit differently. See, for instance this post by the NRDC’s David Goldston or this article from The New Republic by Noah Sachs.

This post on the ACS Blog by University of Michigan law professor David Uhlmann is representative of the arguments being made against the REINS Act, but they are not particularly persuasive. Uhlmann labels the REINS Act “a cynical attempt to block further environmental, public health, and safety protections,” and yet makes few substantive arguments against it.  Throughout the post he insinuates that industry groups will be able to block regulations in in Congress the same way they block substantive bills, but Uhlmann never quite makes this claim because he can’t.  The REINS Act creates an expedited legislative procedure that prevents concentrated minority interests from blocking resolutions of approval.  It ensures a straight up-or-down vote on the floor, so industry can only block a regulation if it can command a majority in at least one house of Congress.

Uhlmann begins noting some of the most significant safety and environmental measures adopted in the past several decades. “It is unlikely that any of the health and safety gains we have enjoyed would have been possible” had the REINS Act been the law. This is a striking claim – it is “unlikely” we would have “any of the health and safety gains we have enjoyed” – and one that is readily refutable.

Continue reading ‘The REINS Act Revisited & A Response to David Uhlmann’ »

On Monday, I testified before the House Judiciary Committee’s Subcommittee on Courts, Commercial and Administrative Law on the REINS Act. The other witnesses were former Rep. David McIntosh and Sally Katzen, who headed the White House Office of Information and Regulatory Affairs in the Clinton Administration. Rep. McIntosh and I expressed support for the REINS Act while Katzen did not. Here are my testimony, my prior post on this hearing, and the C-Span video.

It was a rather short hearing, but the questioning was fairly aggressive, particularly from the Democrats on the subcommittee, including Rep. John Conyers, who attended as the ranking minority member of the committee even though he is not on the subcommittee. During the hearing I was struck by how many of the questions from members were premised on a misunderstanding (or misrepresentation) of the bill, both structurally and substantively. I recognize members of the minority may not have had the most time to prepare for a Monday hearing for which there had only been several days official notice. Nonetheless, I was surprised how unprepared  (or unwilling) some of the committee seemed to be to address the bill on its own terms.  Perhaps I’ve just lived in Ohio too long.

Several members of the subcommittee suggested the REINS Act imposed unconstitutional constraints on executive power, particularly the executive’s responsibility to faithfully execute and enforce federal laws.  Therefore, they suggested, the REINS Act could conflict with Article II, Section 1 of the Constitution.  Set aside the curiosity of House Democrats, including Rep. Conyers, defending executive power.  This objection is based on a fundamental confusion about the nature of executive power. The power to “enforce” the laws – that is, the power to take action to see that legal rules are complied with – is distinct from the power to make the rules pursuant to a delegation of authority from Congress. So, for instance, the EPA’s power to impose fines or other sanctions on companies that violate emission limitations is distinct from the EPA’s power to set the emission limits. A requirement that federal regulatory agencies obtain Congressional approval before major rules may take effect requires Congressional assent for the latter, but has no effect on the former.

Sally Katzen raised a more nuanced separation of powers concern, but one that I also find unconvincing, and for largely the same reasons. She noted that under Morrison v. Olson, “a statute is suspect if it ‘involves an attempt by Congress to increase its own powers at the expense of the executive branch,’” and it is reasonable to see the REINS Act as an effort to constrain the executive. Just look at the bill’s full title and findings. The problem with her argument is that it ignores the distinction between executive and legislative functions.

The powers to investigate and prosecute are core executive functions. Any effort by Congress to limit such powers and aggrandize its own is problematic.  This point was made not only in Morrison v. Olson (in which the Court upheld the statute in question, despite its intrusion on executive power), but in other cases as well.  The executive power is distinct from the power to adopt legislative-type rules, however.  The latter is not a core executive function. Rather it is a quasi-legislative power that must be delegated by Congress. As the Supreme Court has stressed time and again (and as I noted in my testimony), federal agencies have no authority to promulgate regulations beyond that which has been given by Congress. And what Congress has given, it may take back. Restraining the exercise of such authority, whether by adopting rules for the exercise of regulatory authority (as under the Administrative Procedure Act or the Congressional Review Act) or limiting the scope of such authority is perfectly acceptable, so long as other Constitutional requirements (such as bicameralism and presentment) are satisfied. As the REINS Act satisfies such requirements, there is no problem. The REINS Act does not curtail executive power so much as it places limits on the legislative-like power delegated by Congress.

For more recent comments on the REINS Act, see David Zaring’s posts here and here.  I’ll have more to say on the Act, and the arguments for and against it, in the days to come.

Tomorrow afternoon (back willing) I will be in Washington, D.C. to testify before the House Judiciary Committee’s Subcommittee on Courts, Commercial and Administrative Law on the Regulations from the Executive In Need of Scrutiny (REINS) Act.  This bill would require congressional approval before  new “major” regulations – those regulations expected to cost in excess of $100 million per year — could take effect.  It also creates an expedited process for consideration of new regulations, much like that which has been used in conjunction with “fast track” trade negotiation authority, to ensure that both Houses of Congress take up-or-down votes within a short time frame.  For more detail on the bill, here is a brief white paper I wrote for the Federalist Society on the REINS Act’s central provisions.

The primary purpose of the Act is to ensure greater political accountability for major regulatory initiatives.  Federal regulatory agencies only have that power delegated them by Congress, but regulatory agencies are not always particularly responsive to Congressional concerns.  Nor are members of Congress always willing to take responsibility for how the power they have delegated gets exercised.  Requiring a straight up-or-down vote on new major regulations is a way to address both problems and the expedited procedures ensure that traditional legislative logjams and special interest obstruction won’t prevent consideration of significant regulatory initiatives.  This is why I believe the REINS Act is more about transparency and political accountability than anything else.

I have no idea whether the REINS Act has much hope of passage.  The bill was part of the Republican leadership’s “Pledge to America” and was just introduced in the House, where I would think its prospects are good.  The Senate presents a more significant challenge, as does the White House.  At present, most support for the REINS Act appears to come from those who believe federal regulation is out of control and needs to be restrained.  Given that the REINS Act does not offer a mechanism to bottle up regulations with holds, filibusters or other roadblocks, supporters have adopted the implicit assumption that federal agencies are engaged in more aggressive regulation than the public supports.  From what I’ve seen of the other side (and I have not seen much as of yet), some opposed to the REINS Act likewise assume that regulatory initiatives they would support could not command majorities in Congress.  I don’t know whether this assumption is accurate, but it would say something if there were to be widespread agreement that federal agencies are regulating in a manner the American people do not support.

Additional posts on this legislation, my testimony and the hearing will follow.

UPDATE: My testimony is available here.

In an op-ed in today’s WSJ, President Barack Obama (yes, you read that right — President Obama has an op-ed in the WSJ) announces he is issuing a new Executive Order governing regulatory review.

This order requires that federal agencies ensure that regulations protect our safety, health and environment while promoting economic growth. And it orders a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive. It’s a review that will help bring order to regulations that have become a patchwork of overlapping rules, the result of tinkering by administrations and legislators of both parties and the influence of special interests in Washington over decades.

Where necessary, we won’t shy away from addressing obvious gaps: new safety rules for infant formula; procedures to stop preventable infections in hospitals; efforts to target chronic violators of workplace safety laws. But we are also making it our mission to root out regulations that conflict, that are not worth the cost, or that are just plain dumb.

For instance, the FDA has long considered saccharin, the artificial sweetener, safe for people to consume. Yet for years, the EPA made companies treat saccharin like other dangerous chemicals. Well, if it goes in your coffee, it is not hazardous waste. The EPA wisely eliminated this rule last month. . . .

We’re also getting rid of absurd and unnecessary paperwork requirements that waste time and money. We’re looking at the system as a whole to make sure we avoid excessive, inconsistent and redundant regulation. And finally, today I am directing federal agencies to do more to account for—and reduce—the burdens regulations may place on small businesses. Small firms drive growth and create most new jobs in this country. We need to make sure nothing stands in their way.

The Executive Order is here.  It reaffirms the basic principles outlined in President Clinton’s Executive Order 12866, issued in September 1993, and continues to require agencies to conduct cost-benefit analyses of proposed rules.  As noted in the President’s op-ed, it also requires agencies to engage in  ”retrospective analysis” of existing rules so as to accelerate the pace at which outdated regulations are revoked.  Specifically, it requires all agencies to develop a plan for such retrospective review within 120 days.  If the White House Office of Information and Regulatory Affairs ensures such reviews are meaningful, this could be a significant and positive step.

(Note: I was writing this on the plane without quite being able to see the computer screen, so I’ve gone back and corrected some grammar and spelling, and tried to make a couple of things clearer.  I’ll post separately as well on the topic of national security and the financial crisis, and the role of executive discretion in responding.  But I also wanted to note that over at The Conglomerate, the compadres there are also having a discussion of Professor Skeel’s book, including my friend David Zaring, who, along with the redoubtable Steven Davidoff, was responsible for a seminal article and concept in this question of discretionary regulation, “Regulation by Deal.”)

Flying to and from meetings this week at the Hoover Institution, I re-read David Skeel’s brand-new book, The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences (Wiley 2011), for a second time. I am even more impressed with this book the second time around, and I believe that it is one of the short list of essential books on the financial crisis and the regulatory aftermath. If you have any interest at all in these topics, this is a book to give serious consideration to reading.

The New Financial Deal is very far from being a dense, specialist book readable only by a lawyer, or law professor, or bankruptcy or finance expert. You might guess from the title that the book is a technically useful, but, for the general reader, impenetrable commentary on the Dodd-Frank bill. After all, the bill itself runs several thousand pages of impenetrable legislative language and Skeel himself one of the country’s leading bankruptcy scholars. It might seem from the title that it is simply an unpacking – at the technical level – of what Dodd-Frank says. Technical experts can benefit enormously from such unpacking, but not so much the policy person or general reader.

But it’s not that. On the contrary, Skeel’s considerable achievement in this book is to write accessibly and persuasively about the Dodd-Frank bill. Skeel is an an admirably clear and graceful writer on very difficult topics; it shows in the sentence by sentence prose, but equally in the overall organization and selection of topics for discussion. It doesn’t seek encyclopedic analysis of the zillions of legislative provisions, but instead makes a judicious and profoundly informed selection of the main achievements (and lack thereof) of the legislation. It then succeeds better than anything I’ve read on the topic of financial regulatory reform at placing this in the context of “political economy.”  I don’t mean politics in the day to day sense, but instead the interaction of these financial rules with the political process and the intended and unintended consequences.

II

Corporatism and Brandeis-ism, and the New Resolution Authority

The fundamental reform measures of the Dodd-Frank bill correspond roughly to financial institutions and financial markets. As to institutions, Skeel examines the new mechanisms designed to address systemic risk and the mechanisms created to address supervision of those institutions both before a crisis and after the effective failure of an institution.

The political economy of this institutional supervision is given as two alternative tendencies in American economic regulation. One is the “corporatist” tendency to create a quasi-partnership between government and the largest corporations, so that government is able to exercise in some respects closer control over those corporations but also bending them to its political will – but losing the distance between regulator and regulated that usually makes regulation more effective and more importantly ensuring that those privileged institutions will not be allowed to fail, at least if they play political ball.

The other is what Skeel astutely calls the “Brandeisian” tendency to break up the largest financial institutions so that they cannot become too big, or too interconnected, to fail. He notes – this might surprise some readers – that the New Deal, however empowering government in many matters, was essentially Brandeisian on the treatment of banks, insisting on confining them in function (Glass Steagall, etc.) and in many other ways.

The tendency adopted by both the Bush and Obama administrations has been firmly corporatist. It is evident in the definitions in the Dodd-Frank bill of institutions formally designated as systemically important, but also thereby too big to fail. The corporatist tendency is also a founding feature of Freddie and Fannie, and the extraordinarily politicized activities of both firms as integral to their business models – both buying off Congress and yet chanelling the political will of administrations and bureaucracies – is what Skeel suggests will result from the corporatist model, quite apart from the problem of a lack of moral hazard leading to a regime of permanent bailouts.  (Too big to fail is sometimes correctly criticized as really meaning “too systemically interconnected to fail.”  This is right, but that translates to systemically interconnected firms that, with respect to this feature of risk, are “cartelized” as though they were a gigantic, if loosely, connected enterprise.)

Skeel’s other fundamental point concerning institutions is that the nature of regulatory authority is essentially unconstrained discretion. It is not discretion of the kind exercised by a bankruptcy judge – gap filling and interpretive and discretion existing only for defined issues, existing yes, but within a tightly bound box. It is, instead, one single non-discretionary norm – that certain institutions are too big to fail – but that everything else is discretionary (I exaggerate some, but it helps illustrate the point). It is discretion not as filling in the inevitable gaps, but instead deliberately widening discretion to cover as much as possible. Though Skeel does not frame it this way, I would describe it as “discretion as strategic ambiguity” in which the rule of law is set aside for the purpose of making it impossible to know how you will be treated: allowed to fail in some cases, taken over in others, not allowed to fail and not taken over, with no standards for knowing what results in what. This is the criticism that Skeel makes of the new “resolution authority” for institutions.

Skeel’s deepest normative point, however, is that the regulatory model deliberately undermines the rule of law – particularly the careful establishment of judicial discretion contained with bankruptcy’s special rules of law. Instead, the Dodd-Frank model finds predictable rule-based regulation inapposite to the task at hand and seeks to displace it by deliberate uncertainty, on the one hand, infused with government’s political preferences, on the other. The political preferences are analyzed against one of the most provocative but also, to my mind, persuasive turns of Skeel’s argument: to show how the auto bailouts are the template for the future bailout regime of the financial institutions. The short, accessible yet expert discussion of the treatment of senior creditors in the auto bailouts is outstanding – but most important is how Skeel shows that this, rather than the earlier bailouts in the financial services industry, is the template for future behavior under Dodd-Frank. That, and Fannie and Freddie. Continue reading ‘David Skeel’s Excellent Book, and Comparing Discretion in the Financial Crisis and National Security’ »